Analysts advise investors to stay defensive amid FBM KLCI downgrades


PETALING JAYA: The outlook for the local equity market remains lacklustre following a disappointing corporate earnings season which concluded last week.

And with volatility caused by factors such as the US-China trade wars weighing on sentiment, shares on Bursa Malaysia are expected to trade in a narrow range with a downward bias through 2019.

On that note, analysts advised investors to stay defensive amid the prevailing market environment, focusing on companies with relatively resilient earnings and dividend yields.

According to nine brokerages polled by StarBiz, the FBM KLCI, on average, is expected to end at 1,700 points by the end of 2019, with the most pessimistic estimate coming from CIMB Investment Bank at 1,596 points, and the most bullish from AmInvestment Bank at 1,820 points.

Last year, the Malaysian benchmark index ended at 1,690.58 points on Dec 31.

CIMB noted in its report yesterday that of the 131 companies under its coverage, only 12% reported results that were above expectations in the first quarter ended March 31, while 38% missed expectations.

It pointed out that during the quarter under review, the earnings disappointments were mainly from the agriculture, aviation, banks, media, technology and telecommunications sectors.

“The high ratio of earnings disappointment suggests that Malaysian corporations are facing a more challenging operating environment due to local and external (US-China trade war and slower global growth) factors,” the brokerage explained.

CIMB revised its earnings projection for FBM KLCI, now expecting a full-year decline of 3% for 2019. It had previously expected FBM KLCI earnings to grow 5% this year.

With that, the brokerage cut its end-2019 FBM KLCI target to 1,596 based on 15.5 times price-earnings ratio (PER), compared with its previous target of 1,638 based on 15.1 times PER.

“The downgrade in earnings came mainly from the banking and chemical sectors,” CIMB said.

It, however, raised its FBM KLCI earnings growth forecast to 8% from 6% previously.

Similarly, TA Research forecast the adjusted earnings growth of FBM KLCI component stocks to contract by 3.6% in 2019 before expanding by 9.2% in 2020.

TA Research maintained its year-end target of 1,700 based on 16.3 times PER.

While 61% of companies under its coverage reported earnings that were in line with its forecast, TA Research noted, its research universe’s core earnings contracted 8.1% year-on-year (y-o-y) in the first quarter.

This was due to softer performance of building materials, oil and gas, plantations, power and utilities, technology and transportation sectors, it said.

“In this earnings season, we cut our 2019 and 2020 earnings growth by 4.3% and 2.5%, respectively, mainly after downgrades in the abovementioned sectors,” TA Research said.

“We now expect earnings of companies under our coverage to contract by 1.7% in 2019 before rebounding strongly by 10.2% in 2020, not only driven by lower base effect but also better product prices, higher volume, lumpy recognitions, greater overseas contributions and lower cost,” it added.

As for Maybank Investment Bank (MaybankIB), the concern remained on the external outlook with rising trade tension posing downside risks to Malaysia’s macro and corporate earnings growth.

“Market earnings risk remains on the downside. Most at risk at this juncture is plantation earnings if crude palm oil (CPO) price fails to recover quickly,” it said in its report yesterday.

“Amid the dominant headwinds, we reiterate our defensive strategy for equities. Technology is no longer an ‘overweight’ after we downgraded our call on two stocks this results season,” it added.

MaybankIB noted core net profit of companies under its coverage fell 10% y-o-y in the first quarter, with only 39% reporting earnings that were in line with its expectations.

The brokerage cut its research universe’s earnings forecast to 2.5% this year, compared with 6.1% previously. It also cut its earnings growth forecast for FBM KLCI to 2.5%, from 3.8% previously, for 2019.

Accordingly, MaybankIB lowered its end-2019 FBM KLCI target to 1,680 (from 1,760 previously) pegging it to 15.8 times one-year forward PER (from 16.3x previously).

Amid the market volatility, AllianceDBS Research advised investors to “stay defensive”, sticking to quality names with resilient earnings and yields in light of concerns over prolonged US-China trade tensions which could have wide-ranging ramifications on the Malaysian economy.

AllianceDBS Research said 25% of stocks under its coverage missed earnings expectations in Q1, noting most sectors reported in-line performances after toned-down earnings expectations over the past 12 months.

The brokerage trimmed its 2019 and 2020 FBM KLCI earnings estimates by 2.8% and 3%, respectively, dragged down by banking (net interest margin pressure) and plantation (low CPO price) sectors.

Incorporating its latest earnings revision, AllianceDBS cut its FBM KLCI target to 1,695 (from 1,735 previously), pegged to an unchanged 16 times estimated 2020 earnings.

Meanwhile, Affin Hwang Capital Research trimmed its FBM KLCI target to 1,679 from 1,810 based on an unchanged 18 times estimated 2019 earnings.

The brokerage noted 39.5% companies under its coverage disappointed in terms of earnings delivery in Q1, while 47.6% were in line with expectations, and only 12.9% surpassed expectations.

The earnings disappointments were largely in the plantation, oil and gas, transportation and utilities.

Affin said while foreign outflows might recede over the near term, there was still no significant catalyst for the local equity market, especially given the poor corporate earnings delivery in the first quarter. Moreover, it added, valuations for the FBM KLCI remained at a premium over its peers.

Conversely, AmInvestment argued that near-term supports/catalysts for the market could come from relatively low valuations from a historical standpoint, market-friendly policies from the government, easing US-China trade tensions and potential rate cut by the US Federal Reserve.

It maintained its end-2019 FBM KLCI target at 1,820 based on about 19 times estimated 2019 earnings and 18 times estimated 2020 earnings.

FBM KLCI , market , outlook , corporate earnings